Blog by David Bergman

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Economy remains strong - what is the outlook for interest rates?

The First Glance 12L provides a first look at the financial performance and condition of banks headquartered within the 12th Federal Reserve District each quarter. The 1Q14 report, subtitled “12th District Banks – Improvement Continues,” follows a theme developed last quarter in attempting to show how close economic and banking metrics are to “normal” (i.e., long-term non-recession average) levels. Capital and liquidity metrics remain stronger than these “normal” levels in the post-crisis period. Metrics on local economic conditions, loan quality, and loan growth rates generally have improved markedly, and are closing in on “normal” levels. For example, District bank annual loan growth rose to a healthy 10% year-over-year, on average, through 1Q14, close to long-term non-recession District norms of 12%-14%. Profitability, however, remained hampered by the low interest rate environment; and “reserve releases,” which have continued to provide a boost, likely will end soon. So, it may be a long time before banks return to “normal” profitability levels; and maybe there will be a “new normal” for profitability that is lower than previous standards. Going forward, interest rate risk is one of top concerns among supervisors, as loan and investment securities maturities have lengthened. As rates rise, some banks may have to replace non-maturity deposits likely to flow out, with higher-cost deposit products or borrowings. Some may also experience delays in variable-rate loan repricing until loan rates rise above contractual floors. These factors could limit net interest margin expansion among otherwise asset-sensitive institutions.

For the full report click on this link: http://www.frbsf.org/banking-supervision/publications/first-glance-12l/2014/may/first-glance-first-quarter-2014/?utm_source=mailchimp&utm_medium=email&utm_campaign=first-glance-2014-q1

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